Getting Serious about Health Savings Accounts

Banks worried about the technological or operational costs of supporting health savings accounts need not fear. Though the complexity of the accounts may have kept some banks from offering them in the past, early-adopter banks say the basic technology requirements for HSAs are not onerous. That is, unless you plan to offer a product to outclass the burgeoning competition.

After a slow start, tax-advantaged HSAs, which became available in January 2004 and allow consumers to sock away pretax funds for medical expenses, are starting to take off. More than 600 banks now offer the accounts, according to Information Strategies Inc., a Fort Lee, New Jersey-based marketing and information firm targeting small businesses.

Most banks will find that minor adjustments to their core banking or IRA systems will get them in the business. But the current landscape of health care bankingu00e2u20ac”heavy on information, light on integrationu00e2u20ac”means there is ample opportunity to wow customers with services that go beyond the norm.

“Those banks that have systems in place that make it more efficient for customersu00e2u20ac”whether employers or individualsu00e2u20ac”will be at a distinct advantage,” says Mark Baran, counsel in the Washington, D.C. office of Atlanta-based Powell Goldstein LLP.

While the amounts customers can contribute to the accounts are relatively smallu00e2u20ac”$2,650 for individuals and $5,250 for familiesu00e2u20ac”they offer an advantage over flexible spending arrangements, which have been around since 1979, because they do not require holders to use the allocated funds within a certain period or lose them.

That feature also makes them much more attractive to financial institutions. Unlike FSAs, which are mostly transactional accounts, HSAs offer an asset-management opportunity since funds can accumulate over time. As of December 2005, 79% of banks that offered the HSA product also offered investment options with the accounts, up from only 9% the previous August, according to Information Strategies.

The ability of HSAs to drive deposit growth has been a major factor in their adoption by banks. Without too much effort, institutions can make the accounts available, train personnel to explain them, and begin accepting checks.

Merrill Bank of Bangor, Maine, with $417 million in assets, has opened a little more than 100 accounts since it began offering them about a year and a half ago, and it soon expects to add another 80 through a large commercial customer, said Ed Clift, chairman and CEO. Hilltop National Bank in Casper, Wyoming, with $372 million in assets, opened nearly 500 accounts between late 2004 and the summer of 2005. Omaha-based Security National Bank, with $471 million in assets, opened just over 400 between spring 2004 and summer 2005.

Hilltop National offers the ability to pay medical bills through a debit card, a feature that turned out to present the biggest challenge to getting its program up and running, says Sally Minihan-Ayers, vice president for human resources. The bank discovered that funds can be easily debited from a checking account at the point of sale, but not from a savings account. Working that problem through “cost us some delay in getting the product released,” Minihan-Ayers says.

Linking health savings accounts to plastic cards is just one way banks are trying to enhance their offerings. Though a rarity now, Needham, Massachusetts-based TowerGroup predicts the feature will become commonplace. At year-end 2004, about 14% of all health savings products were card-equipped, up from 3% in 2002, the research firm says. It predicts 95% of HSAs will be linked to a card by 2010.

Banks with big HSA aspirations are thinking far beyond cards in terms of how to make their offerings stand out from the pack. The $850 million Park View Federal Savings Bank of Solon, Ohio, which declined to disclose its number of HSAs, envisions offering a fee-based service that would smooth out the health care payment process. Currently, health care payments tend to occur through a myriad of billing agencies, which serve as middlemen between doctors/hospitals and payers and interact with multiple payment clearinghouses.

The emergence of high-deductible plans through HSAs gives banks the opportunity to play “an integral part” in health care payments, says Harold Rogoff, health savings account manager at Park View. Previously, doctors and hospitals looked to insurance companies to get paid; now they’re looking to patients, giving banks their entru00c3u00a9e. “We hold the money, and we also have all the information on transactions,” Rogoff says.

Getting its payment system up and running is taking longer than originally envisioned, he explains, though the bank expects to implement it sometime this year. It has to contend with privacy issues mandated by both the banking and health care industries. Plus, it has to work around the fact that some customers may not want to have their health care payments automatically deducted from their accounts, preferring to pay manually, Rogoff says. “We’re not rushing into this,” he says. “It has to be done right and done correctly.”

More detailed health care information for customers is the vision of Schaumberg, Illinois-based American Chartered Bank, which has $1.6 billion in assets and about 10,000 health savings accounts. “We want to provide information to clients to help them make better decisions,” says Ronald R. Hunt, senior vice president.

Reams of health-care-related information, such as the average cost of certain treatments, hospital performance rates, doctor success rates, and prescription drug costs are now publicly available. American Chartered would purchase the information and make it accessible to clients on a website.

“It’s out there as a differentiating concept,” Hunt says, though he notes the bank’s current focus is on acquiring as many HSAs as it can.

As the undisputed leader in health savings accounts with about 150,000 of them, it’s no surprise that Sheboygan, Wisconsin-based HSA Bank, now a subsidiary of Waterbury, Connecticut-based Webster Bank, is pursuing HSA-related technology on a number of fronts. In late 2005 it introduced a multipurse debit card that accommodates consumers holding more than one type of health account. The card is designed to draw funds from the appropriate account, be it an HSA, FSA, or HRA (health reimbursement arrangement).

By mid-year, HSA Bank expects to give its HSA holders many more investment options and allow financial advisers to be part of the process. This will drive new business from advisers who have been itching to open HSAs on behalf of their clients, but have not had access to an automated platform from which to do so. Only about $20 million of HSA Bank’s HSA balances are currently invested in brokerage accounts, compared to about $250 million of its traditional bank balances, but President Kurt Hoewisch expects that number to grow significantly once the link to financial advisers becomes available.

HSA Bank also is working with software vendors in the health care industry to integrate its HSA information into portals that would let consumers manage the money flowing into and out of their accounts. These websites, which would likely be branded by insurance companies, would let consumers submit claims, make payments, see how much is left of their deductibles, and execute other tasks.

“Our bank would be tied in with all the information, so it’s seamless,” Hoewisch says. “Most community banks offering HSAs are not integrating with anyone.”

Such integration may become more standard, according to Kevin McKechnie, staff director at The HSA Council, a division of the American Bankers Association and the American Bankers Insurance Association, which was formed at the end of 2005. As recently as six months ago, the software needed to accommodate the integration of banking, health insurance, and brokerage information and to present it in a user-friendly way to consumers was not widely available, he says. That is changing as software developers in the health care and banking industries have responded with what he calls vertically integrated systems. Even so, says McKechnie, a challenge remains in getting systems broadly disseminated to the banking industry so that different sizes of banks can afford them.

Brookfield, Wisconsin-based Fiserv Inc. and Metavante Corp. in Milwaukeeu00e2u20ac”both big names in bank data processingu00e2u20ac”are moving into this arena. Fiserv has a handful of banks using a new portal-based solution that “lets the financial institution be more than just a bank account,” says Jim Sizemore, CIO of Information Technology Inc., a Lincoln, Nebraska-based subsidiary of Fiserv. Several banks have the portal software in their 2006 business plans as they seek to differentiate their HSAs from the competition, Sizemore says.

McKechnie notes that HSAs embody the convergence between banking, insurance, and brokerage that the industry has been heralding for years. “This is the first product that integrates everything in the financial services world,” McKechnie says. The challenge, he says, is “fitting all these technologies that are one- and two-purpose into the whole boat.”